ECONOMY

Residential housing market up against unfavorable factors

The Greek residential real estate market has been one of the first victims of deteriorating economic conditions and things are likely to get worse before they get better. The question is whether this key market has entered a long period of stagnation, is just going through a typical cyclical downturn or both. The post-World War II history of Greece’s residential real estate market, which represents the biggest component of this industry locally, is characterized by long cycles. The market grew rapidly for some 20 years thanks to the introduction of «antiparochi» in 1958. Antiparochi refers to an agreement between a landowner and a constructor in which the former provides land to the latter in exchange for a certain number of apartments from the building to be constructed. This 20-year bull market came to an end in 1978 when house prices and rents had risen to high levels compared to the country’s economic fundamentals. At the time, the government realized the construction industry had overheated, depriving precious capital from other sectors, such as manufacturing and tourism, and many households were spending a good part of their disposable income on rent. To deal with the situation, the conservative New Democracy government passed a law that froze rents and prohibited landlords from renting the apartments at a higher rent if the occupant was leaving, even voluntarily. However, that law froze not only rents but the entire residential property market as well, since it was not profitable to buy an apartment to live in or to rent out. Households reacted by boosting their bank deposits and buying short-term securities (e.g. ETBA bonds) that offered double-digit returns. It took at least 10 years for the residential market to start gradually breathing with sale prices stabilizing and slightly increasing between 1988 and 1997. The protracted period of stagnation had depressed house prices to low levels compared to those justified by economic fundamentals and left many households with a lot of cash to invest. The steady decrease in savings interest rates from 1998 onward, following the drachma’s depreciation and entry into the ERM II (Exchange Rate Mechanism) of the European Monetary System in March 1998, the drop in inflation and lending interest rates provided the impetus for a new multi-year bull market. Greece’s entry into the eurozone contributed to a sharp decrease in mortgage interest rates and, along with the scare of the stock market bubble during 1999-2000 and the entry into the country of hundreds of thousands of immigrants, contributed to a sharp rise in residential prices until 2003. After a temporary lull between 2003 and part of 2004, buyers were again in the driver’s seat and prices took off, aided by the government’s announced intention to raise the so called «objective prices of houses» on which taxes are calculated and to introduce Value Added Tax (VAT) on new buildings starting in 2006. Although the Greek residential market is quite fragmented and it is difficult to estimate price changes, it is generally accepted that prices of newly built apartments either rose by a single digit or stabilized in 2007 and either fell or were steady last year. According to most real estate experts, house prices have been on a slightly downward trend since the beginning of the year and transactions are sharply down year-on-year. This is not surprising, since the Greek economy is losing steam and unemployment is on the rise, whereas disposable income growth is expected to slow down considerably. Moreover, most buyers expect house prices to decline before they decide to bite the bullet, analysts say. This notion is being reinforced by the large stock of unsold houses estimated at between 80,000 and 300,000 properties by various real estate pundits. Although constructors have cut down sharply on building new apartments as demonstrated by the more than 50-percent year-on-year drop in building permits at the end of last year, the large stock of unsold flats and detached houses, in conjunction with weak demand, create an unfavorable environment for the country’s residential market. So, it is reasonable to expect that house prices will decline further on average, perhaps not much, before they stabilize, even though the majority of Greek constructors are not heavily leveraged and have made sizeable profits during the boom years, making them less willing to reduce prices. At this point, the weakness of the Greek residential market is clearly cyclical in nature, since it reflects the economic downturn. Whether this will eventually mark the start of another long period of structural weakness remains to be seen. However, one can easily see house prices remaining generally steady over the next two years, following this year’s likely decline, as the large stock of unsold apartments is drawn down and demand moderately rises.